Insights

President Barak Obama signed into law on May 22, 2009, the Credit Card Accountability Responsibility & Disclosure Act.  This sweeping legislation has significant implications for consumers, banks, and many businesses who issue gift cards.

Consumer will be the biggest beneficiaries when key provisions of this Act become effective February 22, 2010.  Lawmakers have channeled into the CCARD Act consumer angst and ire over card issuer abuses and questionable tactics over rising interest rates and card fees.   The top 10 benefits to consumer include:

1. Interest rates cannot be raised during the first year of an account
2. Customers will be notified 45 days in advance of any change in interest rates
3. Bills can be paid online or over the phone without incurring a processing fee
4. Customers must be over 60 days late on payments before their interest rate can be raised on balances; if the rate is raised, it will go back to the lower rate if customers make the minimum payment on time for six months in a row.
5. Overlimit fees cannot be charged unless cardholders are told that the purchase will put them over their limit and they authorize it to go through anyway
6. If a card has more than one interest rate on balances, then payments must be applied to the highest interest rate first
7. Gift cards can’t expire for five years, and issuers can’t charge dormancy fees for unused amounts left on the card
8. Credit card statements must be mailed out 21 days before they’re due
9. Individuals under 21 will need a co-signer on their cards unless they can prove that they have the means to make payments on their own
10. Credit card agreements will have to be posted on the internet

Understandably, banks were not supporters of this Act as it decreases and changes their revenue mix.  According to industry observers, card issuers will adjust to the new reality and make up revenue shortfalls from traditional sources – higher interest rates, fewer reward programs and possibly more annual fees.

The CCARD Act does not apply to commercial, business, or small business cards.  However, there is a provision that orders the Federal Reserve to examine the use of credit cards by small businesses and recommend protections to Congress in 2010.

Merchants who issue gift certificates or gift cards, including general purpose prepaid gift cards from Visa, MasterCard, and American Express,  will be impacted by a provision in the CCARD Act.  It will be difficult for businesses to generate revenue from various inactivity or dormancy fees.  Salient points of the gift card and gift certificate measures include:

1. Cards cannot expire any sooner than 5 years from the last date money was put on the card
2. Inactivity or dormancy fees are banned until after 12 months of inactivity, and at that point a monthly fee may be assessed
3. No more than one fee may be charged in any given month
4. The Federal Reserve Board now has new authority over gift cards, including the ability to cap monthly fees, determine when they are assessed, and provide fraud protections

For merchants issuing gift cards, this will be the biggest impact of the CCARD Act.  Merchants will need to understand the implications of the gift card provision and work their card vendor and internal departments to identify and implement operational changes.   However, merchant who do not assess inactivity fees or have gift card that expire will be minimally impacted.

To the dismay of many merchants, provisions relating to interchange fees and merchants ability to offer discounts to cash paying customers were not included in this Act.  There is an amendment that calls for the Comptroller General’s office to do an in-depth study of interchange, including large and small merchants’ ability to negotiate with card networks on fees. The report is due within 180 days of the bill’s enactment.

The CCARD Act is a tremendous win and step forward for consumers of credit cards.  It seems something similar is needed for merchants, acceptors of credit cards, in the way of interchange reform.  On June 4, 2009, House Judiciary Committee Chairman John Conyers reintroduced legislation designed to give merchants more control over interchange fees.  The fate of this bill is very uncertain but lobbies for both merchants and banks will be heavily engaged, and we expect banks to be more aggressive having just lost their battle with consumers.  However, lawmakers will be a bit more reticent in implementing additional bank regulations that will further impact banks profitability, especially after sector weakness and increased regulations from the mortgage meltdown and the CCARD Act.  We will just have to wait and see…

Click here to read the entire bill.